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January 17, 2003


The opinion of the court was delivered by: George B. Daniels, United States District Judge:

Plaintiff Bronx Legal Services ("BLS") brought suit against defendants alleging violations of the Legal Services Corporation Act, federal and state anti-trust violations, retaliation in violation of the First Amendment, violations of the New York Judiciary Law, and state tort claims. Defendant Legal Services Corporation ("LSC") filed a motion to dismiss and defendant Legal Services for New York City ("LSNY") filed a motion for judgment on the pleadings. For the reasons stated below, defendants' motions are granted.*fn1

Federal Rule of Civil Procedure 12(b)(6) allows a party to move to dismiss a Complaint where the Complaint "fail[s] . . . to state a claim upon which relief can be granted[.]" FED. R. Civ. P. 12(b)(6). In reviewing a motion to dismiss, this Court accepts the allegations in the Complaint as true and draws all reasonable inferences in favor of the non-moving party. See Patel v. Searles, 305 F.3d 130, 134-35 (2d Cir. 2002). Here, a motion to dismiss will only be granted if the plaintiff can prove no set of facts in support of its claim that would entitle it to relief. See Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1494 (2d Cir. 1992). A court may look at the Complaint and any documents attached to, or incorporated by reference in, the Complaint. See Dangler v. New York City off Track Betting Corp., 193 F.3d 130, 138 (2d Cir. 1999).

The Legal Services Act Claim

Plaintiff argues that the concerted actions of LSC and LSNY to "force" BLS to reorganize itself as a wholly-owned subsidiary of LSNY or else lose federal LSC funding violates the Legal Services Corporation Act ("LSC Act"). Plaintiff argues that the statute and regulations require that LSC award funds based on competitive bidding among legal service providers, and that the reorganization plan violates that mandate.

LSC is a non-profit corporation established in 1974 by the LSC Act for the purpose of "providing financial support for legal assistance in noncriminal proceedings or matters to persons financially unable to afford legal assistance." 42 U.S.C. § 2996b(a). LSC itself does not directly provide any legal services to clients. It provides grant money and contracts with various other legal services organizations. Those organizations either provide legal services, or in turn subcontract out to another organization. LSNY currently is the only legal services organization in New York City that receives grant money directly from LSC. LSNY, in turn, sub-contracts out to seven county-wide legal services organizations to provide legal services to indigent clients. Plaintiff is one of LSNY's sub-grantee organizations that directly service clients.*fn2 The regulations adopted by LSC require that legal services organizations seeking to obtain LSC funds go through a competitive bidding process, whereby qualified applicants submit applications to LSC for grants and contracts. See 45 C.F.R. § 1634.1.

In support of its argument that the reorganization plan violates the competitive bidding mandate, plaintiff argues that since 1998 the number of LSC-funded legal services organizations has decreased nationwide from 262 to 207. Plaintiff contends that that decrease is a direct result of LSC's nationwide initiative to reorganize and consolidate legal services organizations.

However, even if this is true, this does not lead to the conclusion that the competitive bidding mandate has been violated. The regulations only indicate that a "competitive system" will be used to award grants and contracts to applicants. See 45 C.F.R. § 1634.1. Neither the LSC Act nor the regulations mandate a specific number of grants that must be awarded each year, and plaintiff does not contend that they do. Nor does plaintiff allege that LSC has refused to take applications, or is utilizing some other means to prevent county-wide legal services organizations, like BLS, from independently applying directly and competing for LSC funds. In fact, if plaintiff chooses to reject LSNY's reorganization plan, and LSNY does not renew its funding contract with BLS, plaintiff has alleged nothing in its Complaint that would lead to the conclusion that it could not apply directly on its own for LSC funding. Plaintiff simply has not alleged any facts sufficient to state a claim that defendants' actions have violated the competitive bidding requirement.

Plaintiff further argues that LSC's actions are arbitrary and capricious, and not authorized by the "Powers, duties, and limitations" section or by the "Grants and contracts" section of the Act.*fn3 The "Powers, duties, and limitations" section authorizes LSC to "provide financial assistance to qualified programs furnishing legal assistance to eligible clients, and to make grants to and contracts with" a variety of legal service providers. 42 U.S.C. § 2996e(1)(A). Pursuant to the "Grants and contracts" section, LSC is required to "insure that grants and contracts are made so as to provide the most economical and effective delivery of legal assistance to persons in both urban and rural areas[.]" 42 U.S.C. § 2996f(a)(3).

By the plain language of the "Powers, duties, and limitations" section, LSC is not required to give out money to every applicant, rather only those that are "qualified." Further, the "Grants and contracts" section mandates that LSC only give out money in a manner that is economical and that effectively delivers legal assistance. Therefore, the Act necessarily empowers LSC to make a determination, in light of the goals and mandates of the Act, as to what criteria constitutes a successful application, and turn down those applicants that do not meet that criteria. LSC has determined that if LSNY, a grantee legal services organization, wants to continue to receive LSC funds, it must better structure itself so as to more efficiently and effectively meet the needs of the indigent in New York City. In response, LSNY made the determination that city-wide consolidation of sub-grantee legal services organizations, like plaintiff, was the best method of achieving this goal. Although plaintiff may not agree with defendants' determination, it is not arbitrary or capricious. Plaintiff simply has not alleged any facts that, even if taken as true, would lead to the conclusion that defendants' actions violated the LSC Act. Therefore, defendants' motions to dismiss the LSC Act claim are granted.

The Anti-Trust Claims

Plaintiff argues that defendants' actions violate three anti-trust provisions. First, plaintiff argues that defendants actions constitute an unlawful conspiracy in restraint of trade, in violation of § 1 of the Sherman Act. Second, plaintiff argues that defendants violated § 2 of the Sherman Act by conspiring to monopolize the relevant market. Lastly, plaintiff argues that defendants conduct violates the Donnelly Act, New York's antitrust law.*fn4

Section 1 of the Sherman Act makes unlawful "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States[.]" 15 U.S.C. § 1 (2002) (emphasis added). Section 2 of the Sherman Act provides that "any person who shall monopolize, or attempt to monopolize, or combine or conspire . . . to monopolize any part of the trade or commerce among the several States . . . shall be deemed guilty of a felony[.]" 15 U.S.C. § 2 (2002) (emphasis added). In both sections of the statute, therefore, the unlawful activity must affect "trade or commerce."

Although the Sherman Act does not define what activity constitutes "trade or commerce," the Supreme Court has noted that the legislative history of the Act reveals that Congress identified restraints and barriers in business competition as the problem the statute was intended to address. See Apex Hosiery Co. v. Leader, 310 U.S. 469, 493 n. 15 (1940) ("`Business competition' was the problem considered and . . . the act was designed to prevent restraints of trade which had a significant effect on such competition.") The Act was intended to prevent "restraints to free competition in business and commercial transactions" because those restraints tend "to restrict production, raise prices or otherwise control the market to the detriment of purchasers or consumers of goods and services." Hamilton Chapter of Alpha Delta Phi v. Hamilton College, 128 F.3d 59, 63 (2d Cir. 1997), quoting Apex Hosiery, 310 U.S. at 493. "Trade or commerce," as used in the Act, therefore, necessarily relates to the business of the exchange of goods in the marketplace. See e.g., Dedication and Everlasting Love to Animals v. Humane Soc'y of the United States. Inc., 50 F.3d 710, 712 (9th Cir. 1995) (hereinafter "D.E.L.T.A.") (noting that the Supreme Court has spoken of the term "commerce" in the Act as relating to the purchase, sale, or exchange of commodities.) Consequently, the "trade" or commerce element of the Act does not apply to all transactions, but rather to those transactions that can be characterized as "business" or "commercial." See e.g., United States v. Brown Univ., 5 F.3d 658, 665 (3d Cir. 1993) (analyzing a § I claim and finding that "[i]t is axiomatic that section one of the Sherman Act regulates only transactions that are commercial in nature.")

Non-profit organizations are not per se entitled to exemption from the Sherman Act. However, when these organizations "perform acts that are the antithesis of commercial activity, they are immune from antitrust regulation." Id. "The legislative history of the Sherman Act reveals that it was not intended to reach noncommercial activities that are intended to ...

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